Submitted by
Covestor
Ltd.
as part of our
contributors program
.
Author:
James
Roberts
I would much prefer to write about the stocks that I have
purchased than those that I have sold. Accordingly, I will share
some of my thinking underlying the addition of 32 more shares of
Berkshire Hathaway Class B (BRK.B), bringing the holding in the
account to 100 shares. That stock is by far the largest holding in
the account. In addition, it will soon be added back to each
account that I manage. One of the attractions is that owning
Berkshire will decrease portfolio turnover.
When I was employed at a hedge fund from 2001 until May 2009, I
often shorted Berkshire to take advantage of perceived or predicted
market weakness. That hedge fund was and still is largely attuned
to fundamental value measures. Among those that we paid close
attention to were: Price Earnings Ratios, Price to Sales Ratios and
Price to Book Value Ratios.
Berkshire often looked expensive according to one or more of the
ratios. The Price Book Ratio is a quick guide to the assets of the
company in relation to the stock price. Berkshire owns 100% of some
companies that are no longer publicly traded or have never been
publicly traded.
Two companies come immediately to mind, Dairy Queen, and Shaw
Industries (a carpet manufacturer based in Georgia). Most
stocks typically trade at prices that are in excess of a one to one
price to book ratio.
Buffett himself has expressed the opinion that the Price to Book
ratio is not particularly meaningful as it applies to BRK B because
of the wholly owned companies in the portfolio and the long holding
periods for most of the portfolio companies. Buffett's mentor,
Benjamin Graham, probably paid more attention to the Price Book
Ratio than Buffett.
Graham felt that if the difference between the intrinsic value
of a company and its market price was great enough then a concept
that Graham called the "Margin of Safety" became
relevant. Buffett has often said that the best holding period
is forever. When a stock is held forever, there is no taxable event
created unless the company pays a dividend. Buffett does not prefer
that his companies pay dividends, unless they can't find a way to
invest in growing the business with adequate returns.
It is ironic that the idea of taxing the wealthiest among us to
a greater degree has been dubbed the "Buffett Tax" because a key
element in Buffett's strategy is to avoid taxes so that the amount
of capital at work is kept at its highest possible level. Indeed,
Buffett is paid but a nominal salary which may be influenced by his
desire to avoid paying taxes.
Essentially, Investors in BRK B have been getting Buffett's
investment expertise for nothing all these years. The prospect of
finding a successor to Buffett has been a concern for many
investors because Buffett was born on August 30, 1930.
For me, that concern has been answered with the recruiting of
Todd Combs and Ted Weschler. "Todd Combs built a $1.75
billion portfolio (at cost) last year, and Ted Weschler will soon
create one of similar size. Each of them receives 80% of their
performance compensation from their own results and 20% from their
partner's," according to the company's 2011 annual report.
Buffett has enjoyed the benefit of the thinking of Charlie
Munger (vice chairman of Berkshire) for many years. Munger is
credited with influencing Buffett to purchase See's Candy Shops in
1972. I believe that Buffett is encouraging the type of synergistic
thinking that he and Munger have so successfully employed by
rewarding Ted and Todd for the other's results for 20% of their
performance compensation.
Berkshire is beginning to perform relatively better than it did
last year. That could be because some of its largest holdings are
beginning to find more favor. One of them in which a 13% interest
is held is American Express. Banks are another sector of the market
that is acting well. Both Wells Fargo and U S Bank are in the
Berkshire portfolio.
Aside from the banks that are impacted to some degree by the
vagaries of the housing market through mortgage lending and the
household net worth of individual borrowers, Clayton Homes
(manufactured housing) and Shaw Industries (carpeting) and Nebraska
Furniture Mart are impacted by the brighter outlook for
housing.
If the best holding period is forever, then some of Berkshire's
holdings are not going to be outperforming the market at any given
time. Coca Cola (
KO
) might fall in that category, but it is worthy of mention because
it epitomizes the mantra "Buy commodities, sell brands."
Other holdings that may turn out to be joggers rather than
sprinters this year are Johnson & Johnson (
JNJ
), ConocoPhillips (
COP
), Kraft (
KFT
), and Proctor & Gamble (
PG
).
On the other hand, Wal-Mart (WMT) and IBM (IBM) are performing
very well lately. This cursory overview of some of
Berkshire's holdings suggests that a large holding in BRK B does
not jeopardize the diversification that many believe is necessary
to insulate the portfolio from some of the risk in investing.
Covestor models: Fortune's Most Admired,
StockDiagnostics,
Best Ideas
Disclosure: Long BRK.B
* All references to the holdings of BRK B are as of August
31.
Any investments discussed in this presentation are for
illustrative purposes only and there is no assurance that the
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